Now that we’ve had the chance to review last year’s results, let’s go forward to 2012′s predictions:

1. It’s the end of the Euro as we know it. Someone is going to leave the currency union. If Germany was wise, it would be them. (Sure, a strong Deutschmark would put pressure on their exports, but it would give huge buying power to its people–not to mention, having Euro-denominated debts would greatly reduce its debt load.) But inertia and obstinacy, especially among political classes, is a powerful thing. More likely is that Portugal, Ireland, Greece, or Spain will be kicked out of a “full” currency union. Chaos will ensue.

2. Before the Euro breaks apart, first will come a failed Italian debt auction in February. The ECB will finally flood the system with cash. After a few days of rejoicing, reality will set in. Gold will soar eventually above $2,000. The Euro will fall below $1.10. Germany will get nervous. In short, nothing will have changed, except that more bankers will have been made whole on their bad debts at the expense of taxpayers.

3. While long-term investors should look at what is happening in Europe as reason to disassociate themselves from unsustainable sovereign debt, in a world awash in “free” money, there remain few real long-term investors. Instead, the “flight to safety will push up the prices on treasuries. The U.S. ten-year note will spend almost the entire year at or under two percent, and will even flirt briefly with one.

4. Even with interest rates ridiculously low for another year, the housing market will not recover. The problem is and will continue to be the banks’ holding back of a shadow inventory of 6 million homes either in foreclosure, or badly behind on their payments. Until that clears the market, real estate will not find its bottom.

5. Another drag on the economy will be 2012′s Kredit Anstalt moment. Not sure if it will be BNP, or DeutscheBank, or someone else (there are so many bad banks from which to choose), but a major European bank will fail, and fail spectacularly. There won’t be enough money to bail them out and the ripple effects will shock the world. World stock markets will collapse. Countries will try currency controls to contain the crisis, but will succeed in only making it worse. By the last quarter of the year, the phrase “global depression” will be freely used.

6. The Fed will end the year still fighting a mythical deflation monster with an arsenal of ridiculously low rates and gimmicky asset purchases. As a result, inflation will be coming to America. Brutally so. But not in 2012.

7. There will be less employed people in America at the end of 2012 than at the beginning. Still, because of the vast swaths of the disenchanted who simply leave the job market, the unemployment rate might appear to be little changed, or perhaps might even improve.

8. Europe’s PIIGS will have two new members: Belgium and France. Each will end the year paying more than 6% on its 10-year debts.

9. Iran and Israel will not come to blows. There will be no bombing of Iranian reactors. But the heated rhetoric will not dissipate either.

10. Iran will come to blows with the United States. Not sure how or where it will come, but they will launch a successful symbolic strike at what they perceive as impotence. However, war will not be the result. What will result is $120 oil, adding to the economic catastrophe.

11. Russian revolts will continue until they are violently put down. Think Tiananmen on steroids. Putin will hold power. At any cost. Europe, enslaved by its dependence on Russian natural gas, will timidly express “grave concern.” There will be calls for America to withdraw from the 2014 Winter Olympics to be hosted in the Russian ski resort of Sochi. Not wishing to repeat Carter’s 1980 Moscow performance, President Obama will ignore the advice, but to no avail: he will be pilloried for being even weaker than Carter.

12. 2011′s Arab Spring will result in 2012′s Arab Winter of Discontent. Egypt will continue to be a mess. Turkey will be teetering on the brink.

13. NATO will announce that it will end its involvement in Afghanistan in 2014.

14. Speaking of NATO . . . The annual NATO conference in Chicago in May will be a disaster as the splintering economies of several NATO members prompt calls for the alliance to dissolve. Even worse, is the fact that it is simultaneously scheduled to coincide with the G8 Conference, also in Chicago. Like rotting fruit to maggots, the spring meetings will draw tens of thousands of anarchists, militants, communists, and Methodists. It will be 1968 all over again as the city is consumed by riots and a heavy-handed police response. Pundits from left and right will savage President Obama for the sheer stupidity of allowing these two events to occur in his hometown just six months before the election. Occupy Wall Street will completely beclown itself, taking down its President with it. He will never again poll above 43% approval among likely voters after May.

15. The first economic surprise of the year will be that Europe’s failings will show that CDSs are not in as bad a shape as everyone had feared.

16. The second economic surprise of 2012 will be ETFs. The complicated investment strategies will be exposed as Enron-like impenetrable schemes. At least one big respected investment house will collapse as a result.

17. Now to the elections . . . Republicans will pick up between 8 and 12 seats in the Senate, taking control of the upper chamber, but not achieving a filibuster-proof majority. Among the gains will be Michigan, Missouri, Montana, Nebraska, North Dakota, Ohio, Virginia, and Wisconsin. The surprise of the night will be Florida. Bill Nelson will lose. Linda Lingle and Scott Brown will finish excruciatingly close races–close because in both liberal states, President Obama will vastly underperform expectations due to low turnout. In fact, 2012 will be the lowest turnout election since 2000 as blacks, youth, non-government unions, and social conservatives see their numbers fall off from 2008 and 2004. Harry Reid will depart the Senate.

18. Republicans will gain 10 to 20 more seats in the House. Along with the ouster of five or more moderates in the primaries, the Tea Party wing of the GOP will wield enormous power in the lower chamber. Nancy Pelosi will announce her retirement.

19. President Obama won’t win more than ten states. California, New Jersey, and New York will all give him less than 53% of their vote. The only states he wins west of Maryland will be Illinois and some of the ones that border the coast. Only DC gives him greater than 55%. The down-ticket effect on state races will be even worse for Democrats than they were in 2010.

20. President-Elect Romney will immediately let down his base by the nomination of a major financial industry insider as Treasury Secretary. This will be the first of many disappointments that will follow in 2013.

Bonus prediction which will take years to see if it comes true: 2012 will be the last year that a Republican is ever elected President.

UPDATE: I received quite a few comments and emails asking what I meant about the bonus prediction.

In turbulent times it is far easier for those out of power to offer revolutionary reforms than it is for those in power to reform themselves. Power nearly always acts to preserves the status quo. Mitt Romney is the status quo. I believe that President Romney will have a GOP super-majority in the House and a large majority in the Senate. He will be given an enormous opportunity to undertake reform, but he will be unable to do so.

Barack Obama, when he took office in 2009, had that same opportunity. But he was beholden to his status quo: labor at the auto firms, government employee unions in the states whose budgets were bolstered, the green lobby, and Goldman Sachs. Parties in power are hamstrung by the interests that brought them to power. Incrementalism is the only thing they have to offer. It is only those out of power who are unconstrained by the necessity to hold on to it.

Over the next four years I expect numerous so-called “black swans,” events that are thought to be unpredictable, but arise only because shared assumptions are shattered. Today we assume that money has value because government says that it does. We assume that governments will honor their social spending obligations. We assume that Western Europe will remain a peaceful and prosperous place. We assume that China’s capitalist trajectory is ever upward. We assume that developed nations never wage war on each other. Enormous resources rest on these assumptions and others.

Soon these assumption will be tested. Some (most?) will fail and enormous problems will be the result. Solutions to those problems cannot come from those in power, any more than the solution to the housing crisis can come from the banks whose very viability rests on the belief that the value of their mortgage assets will recover. The powerful will always act to preserve the status quo–and when it fails, they’ll attempt to preserve the illusion of it. You need only to see what has happened with the Euro over the past year to understand just how much effort those in power will expend to preserve an illusion.

Over the next few years I expect very bad things; things which require solutions, not illusions. A Republican Party which holds all the levers of power, will shoulder all the blame. As for the Democratic Party, as long as it embraces redistributionism it will always have a natural constituency. It can never go away.

In short, at the height of crisis, when Democrats offer only redistribution and Republicans have been repudiated, I expect that a third party will emerge.

NOTE: Thanks to Glenn for the link! While you’re here, please, look around at things like this.

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11 Responses to “2012′s Predictions”

on your last prediction..the only reason that will be true is because there will be a break up of the Us as president romney refuses to bail out states ..or that the other states expected to pay like texas just leave ..

I assume you mean that the Republican party will split. I would posit that the party more at risk is the Democrats. If your prediction about the Chicago riots comes about, centrist Democrats will be looking for somewhere to go.

Bob,
Thank you for the interesting article, it was well written and thought provoking.
My question is regarding your last sentence – why is it you feel that 2012 will be the final election of a Republican president?
Thanks.

As defense analyst Colin Gray Writes in a recent book about the near-term possibilities of major conflict, “Another Bloody Century,”* when considering optimism and pessimism, “optimism is apt to kill with greater certainty.”

– “Fear of China” by Robert D. Kaplan in The Wall Street Journal, on page A14, on April 21, 2006.

Mittens worked to get a 300 million dollar bailout for his Utah hack Olympic speculators. He said last time he ran in the Michigan GOP primaries he would get the big 3 20 billion. His Romneycare was a multi billion government forced income stream to big
pharmacy/Med/and insurance.

And why wouldn’t Mr. Vain Capital support bailing out more? You don’t think he wants.to.be reelected as the saviour of. California?

Given the Iranian threats in the Straits of Hormuz: If the result is the Iranian Navy sunk and their shore instalations destroyed, than the losses for the Democrat Party and Obama may not be that bad. If, more likely, “all diplomatic options are being explored” or any response3 with the word restraint in it is the result; than the negative impact on the Democrats will be worse.

As a bonus though, ANY Iranian attack will relegate Ronpaul (sic) to “Ron Who?” status.

Balsy… I admire someone willing to put his balls on the line with specific long-range predictions. Well done.

In prediction 19: It’s ALL about the Electoral College. In my opinion, that’s why so many in the GOP stayed out of the race… they can do the EC math. Even your optimistic projection gives BHO 182 sure EC votes. Romney will have to pull magic in Wisconsin, Minnesota, and Pennsylvania to meet your dream. The big EC states are the key. Those 55 EC votes in CA and 29 in NY give an opponent a tough slog.

Prediction 14: I think you underestimate the control over the protesters (through funding) held by the Libs. While your analysis is insightful and unique, I think the “movements” will get their orders to “Save it for Tampa in August”.